Germany’s ongoing perpetual crisis has had a significant impact on its entire economy and, due to its large size, on the entire European region.
The current state of Germany is a result of various problems, from bureaucratic red tape hindering businesses to a lack of demand recovery affecting the growth of its key industries.
However, according to Alfred Kammer, the head of IMF Europe, there may be one essential solution to these issues.
“Without a functioning infrastructure, there can be no productive economy,” Kammer told the German newspaper Sueddeutsche Zeitung. He emphasized the need for structural reforms and increased investment in public infrastructure to overcome the recession. A decline in the working population and bureaucratic obstacles further contribute to the country’s challenges.
Germany, as Europe’s largest economy, is projected to shrink by 0.2% in 2024 for the second consecutive year. Economic Minister Robert Habeck has also expressed concerns, highlighting that many of the country’s problems stem from internal structures rather than cyclical factors.
“Germany has neglected many areas over the past decades,” he stated.
Germany managed to navigate through the pandemic and energy crisis following Russia’s invasion of Ukraine, but it has been losing ground in trade and manufacturing for some time. For example, the country’s exports to China, its largest trading partner, have seen a significant decline.
Despite its reputation as a European industrial powerhouse, Germany has been facing mounting challenges domestically. Years of red tape, inadequate investment in modernizing infrastructure, and rising costs have left the country lagging behind other advanced economies.
“The German economy has failed to innovate and modernize. For too long, it has been too arrogant, too complacent—they assumed there would be no competitors to its strong corporate world,” said Carsten Brzeski of ING Research.
German companies like Volkswagen have struggled amid tough macroeconomic conditions and weak demand, contributing to negative sentiment surrounding the country. This was evident when Intel postponed its investment plans in Germany.
Regarding the divergence in growth between European and American companies, Kammer mentioned that the key differences lie in scale and regulations. The U.S. benefits from a large domestic market that reduces unit costs, while achieving a similar scale in Europe requires crossing borders and facing additional costs.
“The EU internal market is hindered by regulatory barriers and other obstacles,” Kammer explained. “European startups also struggle to access the necessary capital for their growth.”
Kammer believes that Germany’s economic situation and recovery prospects deter companies from investing due to uncertainties about the future. However, with structural changes and investment-friendly policies, German companies have shown resilience and adaptability.
Even though the current outlook may seem bleak, implementing necessary reforms and fostering an environment conducive to investment could help German companies thrive in the long run.